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Co-op crossroads Inside Intel

On the Super Bowl in 1997, Intel's "BunnyPeople" jived their way across TV screens in shiny space-age getups and into the popular consciousness. They became nothing less than the whimsical icons of a go-go PC industry.

Then, in a later spot, a chip implanted in Homer Simpson's brain suddenly made the perpetually clueless character a lot smarter. Whoever thought a microprocessor could be so, well, cool?

But it wasn't those ads that made Intel the envy of marketers everywhere. To tech strategists and brand marketers across multiple product categories, it's the huge "Intel Inside" co-op ad program -- now an estimated $800 million annual marketing fund launched in 1991 -- that was Intel's real sleight of hand and the definitive model for successful "ingredient" branding.

Nearly a decade later, the landmark co-op program, lauded as the most powerful ever, is approaching an evolutionary crossroads. As the increasingly volatile PC industry matures and Intel struggles both to extend its core microprocessor business and grow beyond it, the company's massive war chest could begin to shrink amid declining PC ad spending levels.

COMPETITORS' INROADS

The plunge in PC pricing over the past couple of years has meant an influx of low-cost chips from competitors Advanced Micro Devices and Cyrix Corp. Acknowledging the profound market shift, Intel recently began rolling out changes to the program (AA, Nov. 8).

Where Intel previously offered PC makers a 60% reimbursement rate on ads for products powered both by the Celeron and Pentium family of processors, beginning April 1 it will reimburse advertisers for ads for Celeron-powered products at only 40%. The move clearly places emphasis on the company's premium Pentium III and Pentium III Xeon processor brands.

Further, spending for "Intel Inside" appears to be leveling off, remaining flat this year as compared with 1998. It remains an omnipresent influence on the industry, however, with an impressive 87% of PC print ads this year carrying the "Intel Inside" logo.

But Intel, its customers and the media are having to adapt to a changing market -- PC ad pages are coming down from their '98 peak as some PC makers cut back, others disappear, and all eye the Internet.

"A maturation process is going on in the computer industry and magazine publishing," said Sheila Craven, president of Adscope, which tracks tech print spending. "The Web is certainly causing a change to take place. . . . [Intel is] going to have to come up with a new way for vendors of their products to take the product to market."

1,800 LICENSEES

Intel counts almost 1,800 licensees in the program, ranging from big vendors such as Compaq Computer Corp. to small assemblers.

"They do a good job, they listen to their [original equipment manufacturers] and they make changes when they see things happening," said Steve Weeks, worldwide advertising manager for Hewlett-Packard Co.'s business PC organization.

Mr. Weeks cited Internet advertising as an example of where Intel figured out a way to allow vendors to experiment vis-a-vis the rich media program.

"They're very particular about their rules, but they're open to suggestion," he said. "If it doesn't meet my strategy, I'm not forced into the program."

After a decade of consumer branding, Intel has seen its share of the microprocessor market increase to 82.9%, according to Mercury Research, vs. 56% in 1989. The cast of leading PC brands has changed, and the top five PC brands today do have somewhat more share than the top five of a decade ago (see chart).

But for the most part, leading PC makers have been trading market share while Intel has been increasing it. Through its co-op program, Intel created a hotly competitive, low-margin marketplace where PC makers duked it out in ads for look-alike boxes. Intel-financed ads helped create consumer demand, expanding the market and its own lucrative business even as many of its customers have struggled amid the category's profitless prosperity.

`MAGNIFICENT CAMPAIGN'

" `Intel Inside' will go down in history as one of the more magnificent campaigns of the century," said Al Ries, chairman of consultancy Ries & Ries. "It's brilliant and, in a sense, it pre-empted the branding of personal computers."

Added Jack Trout, president of consultancy Trout & Partners, "They took an old idea -- ingredient branding -- which Du Pont [Co.] pioneered, and took it into high technology."

Mr. Trout was an early believer in the program. "Conceptually, it's a good idea," he told Advertising Age in 1991, though he noted that Intel would need consistent advertising over time for the logo to have much meaning.

In its early stages, the program encountered considerable skepticism. The president of an ad agency with a major computer account privately told an Advertising Age reporter then that the co-op effort was "awfully stupid."

"If they spent $1 billion, they're trying to say that a commodity chip is basically different," the agency chief said at the time. "Most people who buy computers don't even know that chip is in there. They care about the performance of the computer. It really doesn't matter what the chip is."

To date, Intel has pumped an estimated $4 billion into the co-op program -- an awfully smart investment, in hindsight. By most accounts, it has been a stellar run in which the chip giant built a brand, influenced a generation of PC users and propelled industry growth.

X MARKS THE SPOT

Intel's insight began, simply enough, in Denver in 1989. The goal then was a campaign to convince consumers to upgrade from a 286 chip to Intel's slow-selling 386SX. Known as the "Red X" campaign -- for depicting the number 286 with a bold, spray-painted red X over it -- the effort is considered Intel's first attempt to market processors directly to consumers.

Dennis Carter, VP-director of strategic marketing, and the architect of "Intel Inside," recalled that Andy Grove, then president-CEO, sent him off to Denver with $5 million to experiment with ads for the 386.

Mr. Carter, then a marketing manager, worked with tech ad shop Shafer & Shafer, Irvine, Calif., on an outdoor, print, radio and in-store ad campaign. There was no turning back.

"We were changing people's buying behaviors," Mr. Carter said. "We had a model of something that worked, impactful creative, and people found it interesting. We proved to ourselves that we could communicate technical information in a basic way, and I concluded that we should do this more. Inadvertently, we had created a brand for processors."

A TAGLINE IS BORN

In 1990, Intel selected Dahlin Smith White (now Euro RSCG DSW Partners) in Salt Lake City, which created the tagline "Intel. The Computer Inside." The marketer rapidly expanded its advertising, focusing on processor families. By 1991, Mr. Carter had built the framework for "Intel Inside."

DSW designed the logo, and in April 1991, IBM Corp., creator of the first Intel-powered "personal computer," became the first computer maker to use the logo.

Next the company began talking to PC makers about the creation of a co-op fund where Intel would take 5% of the purchase price of processors and put it in a pool to create funds for advertising.

"It was a win-win," Mr. Carter said, but ad agencies "hated it because they created these beautiful ads and they're told they have to stick the logo in the lower right" corner.

The program was officially launched in July 1991, and Mr. Carter began playing up the logo in Intel's own print ads as well.

In November 1991, Intel moved its chip campaign to TV, foreshadowing a decade where computer and Internet companies would see TV as the way to reach the masses. DSW's classic "Power Source" spot magically took viewers inside a computer, revealing it as a cool tool. Intel's marketing programs grew, and in 1993 Intel introduced the Pentium processor brand with a national TV campaign. By then, Intel was putting the bulk of its ad money into "Intel Inside" co-op advertising.

"It really is the brand trust fund," said Jami Dover, VP-Sales & Marketing Group and director of worldwide marketing operations.

Ms. Dover, who's logged nearly 20 years at Intel, directs all marketing activities at the chipmaker, which spent $1.3 billion globally last year on advertising, including co-op, according to a filing with the U.S. Securities & Exchange Commission.

Ms. Dover worked with Mr. Carter in corporate marketing and segued to managing "Intel Inside" in 1994, when the program was predominantly print-based. She expanded the program to include broadcast TV and Web advertising, both now critical to Intel's messaging. She also has pushed Intel more deeply into retail promotion.

At this juncture, Ms. Dover is charged with adapting the program to the future: the Internet.

"Our challenge is with the significant upswing in e-commerce -- which we've been playing in to some extent -- what are the logical next steps," she said.

TO ACHIEVE CRITICAL MASS

Ms. Dover said Intel tries to keep its efforts focused in order to achieve critical mass but remains open to its licensees' requests for more flexibility to use the funds in different ways.

For example, Intel will allow PC makers to be reimbursed for ads they use on their e-commerce sites and is expected to extend the privilege to ads promoting products on other e-tailers' sites as well.

"In general, the challenge has been how fast do you innovate, recognizing that this is a significant brand trust fund and it has an ecosystem that affects it," she said.

INSIDE THE INTERNET

So what does the future hold for what is arguably the most influential tech marketing program?

Not surprisingly, Intel is looking to the Internet for its next act.

"Intel Inside the Internet? I don't know how far you can push the envelope for a microprocessor," Mr. Trout said, adding, "[Maybe] it's going to be hard for Intel to go beyond microprocessors."

But Intel could shift the program's emphasis and dollars to support new e-business initiatives, such as encouraging small businesses to use its Internet-based data-processing services and support. It also could leverage the program to extend its dominance in the high-end processor market, promoting the fact that its powerful chips reside in sophisticated telecommunications equipment that route traffic over the Internet.

Is it possible for "Intel Inside" to embed itself in a Cisco powered network? A Lucent router, a Nortel switch?

Mr. Grove, now Intel's chairman, described the company's challenge in the Oct. 25 issue of Fortune. Conceding that slowing chip growth has fueled the company's development of telecommunications networking chips, he said: "We have to face it. The dollar growth potential of microprocessors for desktop PCs is leveling off. It's not going away, but if it were still growing 30% a year, our enthusiasm for these new networking chips would be significantly less."

A NEXT-GENERATION VEHICLE

As Intel searches for a new vehicle to extend its dominance, it may not be able to transfer the "Intel Inside" success story directly into other segments.

"The [Windows-Intel] dynamic has been going on for five years and it's pretty much run its course," said Allen Adamson, managing director of brand identity shop Landor Associates, New York. " `Intel Inside' has become addictive for the computer category, and Intel itself has lost the luster and differentiation now. [Intel] was the only game in town if you wanted a certain level of performance, but it no longer owns that story," he said.

Mr. Adamson added: "They have to strengthen the brand beyond where it is now. . . . they have huge awareness and a lot of esteem, but how do they further differentiate the `Intel Inside' and Pentium brand into any more than a next-generation message?"

Any extension of "Intel Inside" beyond microprocessors would have to adhere to the "intelligent computing aspect," Ms. Dover said.

"The underlying reason for [the program] hasn't changed," she said. "Its job is to build and reinforce the `Intel Inside' brand, and that's not going to change. But it needs to adapt, however, as we segment products and the means of marketing to those audiences.